RPT-INSIGHT-Intel's plans for virtual TV come into focus

* Facial-recognition to serve up personalized ads

* Media heavyweights to work with Intel

* Plans call for year-end launch; still no content deals

By Yinka Adegoke and Noel Randewich

NEW YORK/SAN FRANCISCO, June 8 (Reuters) - Intel is
counting on facial-recognition technology for targeted ads and a
team of veteran entertainment dealmakers to win over reluctant
media partners for its new virtual television service.

But so far it's proving a challenge to get the service off
the ground, thanks to an unwillingness on the part of major
media content providers to let Intel unbundle and license
specific networks and shows at a discount to what cable and
satellite partners pay.

Intel, the world's largest chipmaker, has kept its strategy
to launch a slimmed down cable TV service under wraps as the
tech giant risks getting into a completely new line of business.

According to five sources who have been negotiating with
Intel for months, the company is emphasizing a set-top box
employing Intel technology that can distinguish who is watching,
potentially allowing Intel to target advertising.

The set-top box pitched by Intel doesn't identify specific
people, but it could provide general data about viewers' gender
or whether they're adults or children to help target
advertising, two sources said.

Intel's plans put it in the middle of Silicon Valley's
battle for the living room. Heavyweights such as Apple,
Amazon and Google believe the $100 billion
U.S. cable television ecosystem - dominated by major
distributors such as Comcast and DirecTV Group and
program makers like Walt Disney Co and Time Warner Inc.
- is ripe for disruption for reasons ranging from
shifting viewer habits to ever-increasing programming costs.

While none of these companies have so far been able to make
major inroads, Intel thinks it can build a better set-top box
and over-the-top subscription service to deliver TV content to
consumers, even though the initiative catapults it into virgin
market territory. A successful TV service showcasing Intel
technology could be a big step toward making its chips prevalent
in more living room devices.

"If they can create a virtual network and it incorporates
proprietary Intel technology, they could certainly bring
something different to the subscription TV model." said JMP
analyst Alex Gauna.

Intel's offering aims to exploit one of the TV industry's
major issues: the reliability, or lack thereof, of Nielsen
ratings data on audiences. Nielsen has long been the dominant
provider of TV ratings, but the accuracy of its data has come
under attack by some network programmers, who argue that its
polling system of 50,000 homes is antiquated for the digital
age.

For its part, Intel claims that the new interactive features
in its set-top box would add greater value to TV advertising and
help offset reduced revenue from licensing fees for network
owners.

"They've told us the technology is going to be so much more
interactive with ads that you can make more money. But it's just
a little unproven," said one executive who has been involved in
the talks.

An Intel representative declined to comment for this story.

Chip features making it easier for Hollywood studios to
protect content streamed to computers, as well as tools for
detecting faces and analyzing audiences, are examples of current
proprietary technology that Intel would like to see widely
adopted.

BEYOND PCs

While Intel's processors power 80 percent of the world's
PCs, its chips have not achieved a significant presence in
smartphones, tablets and other interconnected devices. Intel
executives say they are eager to make sure its semiconductors
play major roles in new markets with big growth potential.

According to a company source, ensuring that its chips
become prevalent in home entertainment devices would be the
driving reason behind any Internet TV service it launches.

Comcast, for instance, recently announced the
gradual rollout of an Intel-based set-top box that customers can
control with their smarpthones. Called "X1," the platform will
rely on data centers packed with high-end servers -- which
typically also use Intel chips.

Intel last year wound down a push to make chips specifically
for "smart" TVs after Google TV, which it had backed, failed to
make a major splash with consumers.

At the same time, it formed the Intel Media business group
with a mandate of promoting digital content on Intel-based
platforms.

According to sources, Intel is proposing to media companies
a service could include both a bundle of TV channels similar to
a normal cable package and an on-demand component.

ENLISTING HEAVYWEIGHTS

Intel is intent on launching its video service before the
end of the year, sources said. Original plans called for it to
be launched by November, said one of the sources, but that
deadline likely will not be met.

The biggest problem Intel faces is its inability to reach
deals with major content providers, which are reluctant to
license their networks and TV shows at rates that could undercut
their larger established cable and satellite partners.

Intel wants to keep its costs down by licensing smaller
packages of TV networks instead of replicating the basic cable
TV bundle of more than 100 channels. But network owners won't
agree to smaller bundles without being paid a premium for the
channels they choose to license.

"Why would I want you to take subscribers away from another
distributor at a lower price?," asked the same media executive
who spoke with Reuters on condition of anonymity.

To change that mindset, Intel has assembled a team of
television industry veterans well-schooled in negotiating
distribution deals. Leading the group as head of Intel Media is
Erik Huggers, who worked on media at Microsoft before going to
the BBC. Huggers enlisted as an adviser Garth Ancier, who most
recently served as president for BBC Worldwide America and
before that worked at NBC, FOX, and Disney.

In addition to Huggers and Ancier, sources said, two other
names prominent in TV circles have emerged as consultants for
Intel: entertainment lawyer Ken Ziffren and former MTV executive
Nicole Browning.

Browning, who previously negotiated on the other side of the
table for MTV, has been handling some of the talks with
partners, sources said.

Ziffren built his reputation representing Hollywood talent -
he was instrumental in negotiating the deal that returned the
"Tonight Show" to Jay Leno. Lesser known is his firm's work
negotiating deals for DirecTV's video-on-demand service and
carriage agreements for pay-TV network Starz.

But even that quartet of executives may not be enough to
resolve an intractable problem, which is that content companies
have little incentive to offer their channels to Intel at a
discount and Intel is loathe to pay a premium.

"They'd love a better deal but they won't get one," said
Needham & Co analyst Laura Martin of Intel. "The industry has
always worked on volume discounts."

Underscoring the difficulty insurgent tech companies face in
securing content, Microsoft in January indefinitely postponed
plans for its own online TV subscription service after deciding
that licensing costs were too high, according to people familiar
with those discussions.

And therein lies that dilemma that Intel and other insurgent
over-the-top providers must tackle before their big plans can be
realized.